[Nick1984]

I think he wants to know about the underlying theory behind supply and demand?

He seems to know that if theres a reduction in supply and increase in demand prices will rise?

Maybe you should read "The Wealth of Nations" by Adam Smith or any basic micro-economics book to get a detailed explaination of the theory behind S&D.

Basically supply and demand can be drawn diagramatically as two curves. Supply sloping upwards and demand downwards on the same axis with price on the Y and quantity on the X. Where the two curves meet you have a market at equilibrium and that is the price of a particular commodity. If price is below the equilibrium without a change in S or D then it is a relatively cheap price and buyers will buy the commodity at the cheaper price so they can sell it off at the equilibrium price. Buying will increase and increase and therefore price will increase back to equilibrium. Vice vera for when prices are above equilibrium.

If there is a change in supply i.e. the S curve shifts then we have a new equilibrium. If Supply increases then the quanitity of good available increases. Because there is an oversupply of goods, the relative benefit gained by the consumption of each additional unit of a good is less. Should demand remain unchanged then there is now a downward pressure on prices as a new equilibrium is set. This can be caused by many reasons such as changes in interest rates, changes to tariffs, governmental subsidies, changes to technology which make production easier etc...

Every time supply or demand shift relative to eachother the equilibrium price in the markets is adjusted automatically. This is called the invisible hand effect.


Donno if this helps! Try to read a text book if you really want.

Cheers